Because business process outsourcing is here to stay, Gantry Group has extended the application of its rigorous ROI assessment best practices to include services providers, as well as technology vendors. Just as decisions about IT technology purchases rely on demonstration of a tangible business case, so too are decisions about process outsourcing.

This month's Gantry Group newsletter is focused on the particulars of business process outsourcing (BPO) decisions - specifically the differences between on-shore and offshore vendors. To gain hands-on insight into the ROI value drivers of these two outsourcing alternatives, Gantry Group recently had an insightful discussion with Ben Trowbridge, Managing Partner of the Trowbridge Group, a leading outsourcing and shared services consulting firm with extensive expertise in outsourcing decision processes. Here are the highlights of our interview with Ben.

1. Sometimes suggestions are made at the BOD level based on the feeling of a member who has a sense that too much money is being spent.
2. Or, management may have a quest to improve their operating costs and reduce the need for capital; they look to outsource as a “change agent” in order to standardize and consolidate processes.
3. And finally, unsolicited bids from providers are received and drive an evaluation.

Regardless of what the public announcements say, the biggest driver for outsourcing is cost – whether companies admit this publicly or not. The cost driver is about either reducing or controlling. Interestingly, one of the advantages of outsourcing that reduces cost is conversion of fixed costs to variable costs. This may sound like it conflicts with cost control objectives, but by paying for things as you use them, you can end up paying far less than with a fixed price arrangement.

• Undisciplined and poorly thought out sourcing process.
• Lack of objectivity in approaching the outsourcing business case due to a pre-exiting bias toward outsourcing or shared services.
• Negotiation of a sub-optimal outsourcing contracts that lacks real working SLA (Service Level Agreement).
• Selection of the wrong outsourcing provider and the resultant service delivery failure.
• Failure to be realistic about your expected outcome; outsourcers will say yes to anything, which is how you end up with over-promising and under-delivering.
• Not paying attention to the vendor post-engagement; you need monthly audits and tracking to catch problems in the bud not to mention enforcement of the SLA terms.
• Creation of unsustainable joint venture alliances – these are great vehicles for contract management but not all joint ventures will work especially when the client and the provider have different needs and growth objectives.
• Being impatient. The Service Provider must take a client to best practices over an 18-month to
  2-year period. But initially they have to take on the processes as is.

• Supports development of a more effective business model
• Provides increased flexibility to meet changing requirements
• Enables a more responsive delivery of information
• Forces better quality and consistency of data
• Supports standardization across functions, geographies and business units
• Forces sea change in culture (new way of working) Improves career development for remaining staff

So for example if your current state cost for a transaction was $1, $.55 of that is direct labor and the remainder is IT and facilities costs. For an outsourced provider the main cost component is still labor but their facilities cost component is much smaller. Effective use of facilities is the second largest difference in the comparative costs of outsourcing versus in-sourcing.

First off, very few companies will admit to their offshore strategy for political and PR reasons. Many of us in the industry believe that companies are actually increasing their offshore activities - both through the establishment of company-owned, captive-shared, service centers in low cost locations and through outsourcing.

My understanding is that the problems Dell experienced were driven by factors that could have occurred in South Dakota or Southern India. Business drivers forced the deployment to be rushed and Dell didn’t have time to do proper training of the employees. Our view is that Dell and other market leading companies will increase their off-shoring through a “right location” approach that mixes on- and off-shore tactics. Based on the nature of these technical support calls and the level of expertise that is needed, calls are routed to the right people with the right expertise, in the right country, with the ability to relate to the call or business need.

Obviously, captive shared service arrangements are made only by very large companies with significant volume and scale to make this cost-effective. Captive shared service models are becoming even more prevalent than outsourcing over the last few years, which is putting pressure on offshore outsourcing providers to drive down their costs even further or provide access to skills and processes that otherwise would be difficult for companies to access.

The major difference in ROI comes from the risk and control trade-off between the two options. In the case of captive shared services, you have complete control and an implied view of better security. You have theoretically eliminated paying the profit and overhead of an outsource provider. In theory, that should be the cheapest implementation scenario based on the assumption that there is such a ready pool of labor that you can just “go do it yourself.” But there is extra risk involved - particularly if you are going to operate in another country. You need to build out the facilities and plant, as well as establish legal status in that country. This adds 3-6 months to the process. Then you have to hire not just the US manager, but also a local management team that knows how to manage the operation on your behalf.

With traditional outsourcing you have access to a team that knows how to operate in the country they are in. They understand local tax requirements. They know how to standardize and migrate the work. The business case may look better for captive shared services on paper, but rarely will companies really achieve those savings. The question at hand is execution of a plan, not theory. In most cases, companies will not be able to execute the business case as well. They may have access to the local labor pool, but they won’t necessarily have access to leadership. Careful analysis is required and risk adjusted scenarios should be run to make a prudent decision to outsource or run your own captive shared service center.

The biggest flaw in going with a staged business case is that it is often based on the results from a pilot process. These results are not representative of scale, and therefore, are not representative of real costs. Very often companies start outsourcing processes that require the lower levels of expertise. The real cost savings come when you replace the mid-grade workers.

We think the global company's outsourcing and offshore answer to getting the best cost and span of control is what we call the “2-1/2 center” solution broken down as follows. For the non-English European work it is best to source the work with a center located in Eastern Europe. The English speaking work should go to a major pan-Asia location that has a large English speaking labor pool such as Philippines or India. The work based in the Asia/Pac Rim region that is not English-based would stay in that region in a reduced scope “½ center”.

The outliers to the global answer are usually Japan and China since they are both difficult to outsource in another country. If you have substantial language driven operations in Japan or China, you usually have to outsource in that country to standardize and outsource in that geography.

Gantry Group’s ROI Profiling Service immediately “ROI enables” the sales force. With this service, Gantry Group ROI analysts are available as resources to fully support your sales force.

Since 1997 Gantry Group has provided ROI Calculators, Benchmark Studies, White Papers, Case Studies and ROI Sales Training Materials for hundreds of technology companies in healthcare, financial services, mobile/wireless and business process optimization. Gantry Group’s client list of solution providers includes leading IT vendors such as PeopleSoft, McKesson Health Solutions, Thomson Media, palmOne, Xerox, Politzer & Haney, and Best Software.

For more information on The Gantry Group and the services it provides visit http://www.GantryGroup.com or call (978) 371-7557.